Journal Article

Stylised fact or situated messiness? The diverse effects of increasing debt on national economic growth

Andrew Bell, Ron Johnston and Kelvyn Jones

in Journal of Economic Geography

Volume 15, issue 2, pages 449-472
Published in print March 2015 | ISSN: 1468-2702
Published online March 2014 | e-ISSN: 1468-2710 | DOI: https://dx.doi.org/10.1093/jeg/lbu005
Stylised fact or situated messiness? The diverse effects of increasing debt on national economic growth

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  • National Budget, Deficit, and Debt
  • Single Equation Models; Single Variables
  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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This article reanalyses data used by Reinhart and Rogoff (2010c, American Economic Review, 100: 573–78—RR), and later Herndon et al. (2013, Cambridge Journal of Economics, online, doi: 10.1093/cje/bet075) to consider the relationship between growth and debt in developed countries. The consistency over countries and the causal direction of RR’s so called ‘stylised fact’ is considered. Using multilevel models, we find that when the effect of debt on growth is allowed to vary, and linear time trends are fully controlled for, the average effect of debt on growth disappears, whilst country-specific debt relations vary significantly. Additionally, countries with high debt levels appear more volatile in their growth rates. Regarding causality, we develop a new method extending distributed lag models to multilevel situations. These models suggest the causal direction is predominantly growth-to-debt, and is consistent (with some exceptions) across countries. We argue that RR’s findings are too simplistic, with limited policy relevance, whilst demonstrating how multilevel models can explicate realistically complex scenarios.

Keywords: Public debt; economic growth; multilevel modelling; reverse causality; E60; C23; H63

Journal Article.  8631 words.  Illustrated.

Subjects: National Budget, Deficit, and Debt ; Single Equation Models; Single Variables ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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